Monday, May 14, 2012

Margin vs Markup

It makes me nuts when people mistakenly use "percentage markup" when they mean "points gross margin" or vice versa.

For example, you might say, "I sold those goods at 20 points" or you might say "I sold those goods at 20% markup". Those two statements are not the same!

When you mark up something a percentage you take the cost of goods sold and you apply a percentage to it. For example, a $50 item with 20% markup would sell for $60 (50 x 1.2 = 60).

If instead you sell something for 20 points margin then that means that 20% of the total selling price of the item went to profit. So a $50 item that makes 20 points margin would sell for $62.50 . That means that you made $12.50 on a $62.50 sale or 20% (12.50 / 62.50 = 0.2).

When you're dealing with small margins/markups they can look very similar. For example, 5% markup translates to 4.76 points gross margin or 5 points gross margin translate to 5.26% markup. Outside of 5 points/percent and the difference is non-negligible.

Or to give another example you can look at 50% markup versus 50 points profit:

  • A $100 item sells for $150 with 50% markup.
  • A $100 item sells for $200 with 50 points gross profit.
That's a pretty significant difference when you're on the receiving end of the bill!

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